JPMorgan Chase announced that it is moving into the point-of-sale (POS) financing market. According to Finextra:

The new 'My Chase Plan' financing option allows card customers to select from past purchases of more than $500 and finance them over a longer period with monthly fees, rather than interest-based repayments. The bank is also upping its game in the consumer lending space via 'My Chase Loan', which will enable card customers to borrow against credit lines to fund larger value items. [The] move comes as fresh data indicates that non-bank lenders are widening their market share lead over banks."

There may be "fresh" data showing non-banks' rising market share, but that's driven mostly by mortgage and small business lending. Chase's move into POS financing is driven by other factors--factors that many financial institutions appear to be overlooking.

Consumer Demand For POS Financing is Growing

POS financing certainly isn't new. In 2016, merchants in nine different retail categories saw more than 160 million POS loan applications—only 53% of which were approved, however. According to The Economist:

Driven, in part, by younger consumers, point-of-sale loans are becoming increasingly popular in America. Consumers who might previously have financed purchases such as furniture, electronics or home-improvement projects with a credit card are now opting to borrow at the checkout."

More popular, indeed. Filene Research Institute estimated the annual size of the POS financing market at $391 billion—approximately 3.5% of annual consumer spending—with healthcare, electronics, and home goods as the leading categories.

More than a quarter of consumers have used point-of-sale (or instant) financing when shopping online. More importantly, nearly half would like to be presented with the option to get instant financing when shopping online.

Consumer Experiences and Preferences for Instant Financing

Klarna

According to Filene, more than one in five Millennials between 25 and 34 years old expect to apply for, or increase their level of debt for home renovation/repair loans, and 13% will take on additional debt for home electronics over the next three years. Auto and home loans—the most common types of consumer lending for financial institutions—are at the bottom of the list of categories in which consumers will expand their level of debt.

Where are the Banks in POS Financing?

A few large banks are certainly in the market. At four of the largest banks playing in the POS financing market, year-over-year growth between Q4 2016 and Q4 2017 ranged from 65% at Regions Bank to 123% at Fifth Third Bank as all four exceeded the $1 billion in loans in the quarter.

Point of sale financing, Q4 2016 vs. Q4 2017

Cornerstone Advisors

But many mid-size banks and credit unions appear to be sitting it out. In Cornerstone Advisors' 2019 What's Going On in Banking study, just 3% of banks and 12% of credit unions said that point-of-sale loans would be a high priority in 2019.

Fintech Startups Are Transforming the POS Financing Space

New players have entered the POS financing market in recent years bringing not just digital capabilities to the table but new business models—platforms—to introduce efficiencies and opportunities to the market:

Affirm. Founded by PayPal co-founder Max Levchin, Affirm caters to underserved or underbanked Millennials. Affirm recently partnered with Walmart to offer POS financing online and at nearly 4,000 Walmart stores in the US. Consumers who click on the “buy with Affirm” link land on a page directing them to select Affirm when they complete their purchase transaction.

Blispay. Blispay provides financing for “credit responsible” customers of small and medium-sized merchants. The firm uses a branded app to support digital and in-store purchases. Upon approval, borrowers receive a virtual Visa account to use to complete the purchase. A physical Blispay-branded Visa card is then sent to the customer. To participate, merchants simply complete a form and agree to display Blispay communications.

Bread. Named after the soft-pop music group from the 70s (just kidding), Bread's white-label offering is integrated into the merchant’s user experience. Bread primarily serves mid-market merchants with $10 million to $100 million in annual online sales.

GreenSky. GreenSky partners with banks (including Fifth Third, Regions, and Synovus), who pay a percentage of loans generated. While GreenSky does keep a small portion of loans on its books, the platform focuses primarily on improving the point-of-sale financing experience.

Klarna. Primarily an online payment processor, Klarna offers two payment options: 1) A “try before you buy” option which enables consumers to make a purchase and try the product for 14 to 30 days. If the full balance is paid within the trial period, the consumer pays no interest; and 2) A “pay over time” option, which gives consumers a line of credit to buy products online and pay for them over time, similar to using a credit card.

PayPal Credit. PayPal Credit’s differentiation is its “six months interest-free” offer. PayPal Credit can be offered through any merchant that offers PayPal as a payment option, with or without the merchant’s consent. If consumers opt to pay with PayPal, they’re directed to the PayPal purchase page, which includes an offer for PayPal Credit.

Vyze. Vyze is a cloud-based marketplace of lenders that customizes loan offerings to merchants’ customers. There is a single common application for all lenders, enabling Vyze to provide merchants with a single point of contact regardless of how many banks the merchant works with. In addition, the firm’s cloud-based portal enables it to avoid integrating into merchants’ point-of-sale systems.

Will Banks Miss Another Boat?

Many banks and credit unions missed the shift in consumer behavior away from debit cards to credit cards. Are they missing another shift, this time from credit cards to POS financing?

JPMorgan Chase's move into the market should be a wake-up call for the rest of the industry.